The professional services firm’s global investment committee outlined its long-term expectations for global economic growth in the Secular Outlook 2013, paper, which it says offers a fresh perspective on creating return and understanding risk.
Tim Unger, head of investment strategy at Towers Watson in Australia, said it is critical for institutions with long-term prospects to be able to estimate how global growth rates will change over longer periods in order for them to continually adapt in an increasingly transformative world.
“Consequently those societies, economies and businesses able to manage and adjust to this transformation will be most likely to outperform those that do not; and we suggest the best way of realising this competitive advantage is to overlay quantitative estimates with rigorous thematic analysis,” said Mr Unger.
Tim Hodgson, head of the company’s Thinking Ahead Group (TAG), said a thorough understanding of secular growth dynamics is vital for any long-term investor.
“The process of building those forecasts and understanding the variability around them is a powerful tool in understanding plausible paths for global growth looking forward,” said Mr Hodgson.
The research identified a number of significant predictions. Developed world growth was forecast to be below its long-term trend and while growth in the developing world was predicted to be higher, the research suggested that there were challenges that needed to be accounted for. It also suggested that a more volatile socio-economic environment would likely develop.
To address the impact of historical variables on future long-term economic growth and aid portfolio construction, Towers Watson produced a Secular Growth Index, which it said provides a more accurate forecast of global growth as it includes long-term themes that are expected to impact the way economies expand.
According to Towers Watson, any effective investigation of long-term economic growth needs to include sustainability themes such as ageing populations, new technologies and climate change due to the extended period of transformative change occurring within the world.
The index was constructed using ‘baseline forecasts’ that are qualitatively adjusted based on an assessment by Towers Watsons of the main thematic influences on an economy’s growth prospects.
Mr Unger said it is impossible to capture forward-looking themes using a completely statistical approach that relied on historical data and therefore the company considered a qualitative overlay very important.
“We believe this thematically-enhanced growth forecasting is the best blend of quantitative rigour and qualitative judgement and is a sounder way of producing long-year projections,” he said.
This secular outlook builds upon Towers Watson’s earlier research on sustainability titled We need a bigger boat, also produced by the company’s TAG.
